Fiddling while Rome burns

Kitty Miv, Editor14 March, 2017

Kitty's Country Rankings are below, with a description of how they are compiled. This week, as every week, I give out Encomiums to countries which have done Good Things, and award Execrations for countries which according to my highly personal and partial views have done Bad Things.

When are changes in taxation a tax "reform," and not merely a tax "change"? Why, when the Government says so of course! But I've noticed recently that there is a discrepancy in what some governments think is a tax reform, and what most of the rest of us would consider qualifies as such.

Australia provided a good example of how flexible the term tax reform has become. When it was put to Prime Minister Malcolm Turnbull last week that the Government had failed to take on "big tax reform," he baulked at the suggestion, pointing to recent changes in the state pension scheme and the middle-income tax threshold. Really? That's what you call "reform," Malcolm?

To be fair to the Prime Minister, he said this while making a very good case against increasing GST. But this is a country which seems to be crying out for meaningful tax reform. Indeed, barely a week seems to go by without one organization or another calling for it, including the OECD earlier this month.

Taxpayers have been promised root and branch-type tax reform for the last 25 years by one government another. Patience is wearing thin, and just fiddling about with tax thresholds won't cut it anymore. Fiddling while Rome burns, you might say.

British taxpayers, and more specifically those of the self-employed variety, were also promised reform in the 2017 Budget announced last week. Admittedly, not by the Government itself, but largely by a media anticipating the start of a generational shift in the tax and legal framework that recognizes how technological change and the emergence of the gig economy are fundamentally altering the world of work. They didn't get it.

What they got was an unexpected increase in National Insurance (social security) contributions intended to align the taxation of the self-employed with the employed. This was Chancellor Philip Hammond's supposedly big idea to address tax concerns linked to the growing army of self-employed workers in the UK, which has reached about 5 million people.

Not surprisingly, he's been on the defensive almost since the words left his lips on the House of Commons floor on March 8. Indeed, the floor is where many self-employed taxpayers would dearly like to put Hammond after he pulled this unpleasant surprise. Not that I ever advocate violence to solve arguments of course. In any case, there's a fair chance that aggrieved taxpayers taking this issue to their local Conservative Member of Parliament could find a friendly voice, for a significant number of Hammond's own governing party are threatening to rebel against the measure.

The Government insists that critics have got their sums wrong, and that in actual fact the Budget overall will leave the lowest-paid self-employed taxpayers marginally better off. But that's besides the point. This measure has gone down like a lead balloon for a number of reasons. Firstly because it contradicts the Government's core message that it is pro-enterprise and the friend of aspiration, second because it broke a manifesto commitment not to raise tax or NIs, third because it fails to address the fundamental question of the changing work environment, and last because Hammond couldn't wait for the publication of a government review into this very issue, expected in the coming months, before moving. Perhaps he knows something the rest of us don't.

Still, there's plenty of time for a u-turn, after Prime Minister May helpfully postponed legislating for the measure until the end of the year to allow for a period of "calm" reflection.

Problems with outdated tax laws certainly aren't unique to the United Kingdom. The United States is another place where work patterns have left tax rules well and truly behind – in the haze of a car's tailpipe or the wake of airplane's contrail, you could say. Because, unbelievably, we are still in a situation where employees may be legally required to file an income tax return in every state in which they have conducted business, even if they were there for only one day. Surely the costs of administering such absurd rules routinely outweigh the amount of tax – if any – that is collected from mobile employees!

But thankfully sanity may soon prevail. A bill has been reintroduced into Congress to standardize state income tax requirements for employees working out of their state of residence, and the measure has wide bipartisan support. However, those affected by such anachronistic rules shouldn't get their hopes up too much. These proposals have entered Congress before without being approved. And one gets the impression that House Republicans and the fledgling Trump administration have bigger fish to fry for the time being.

As we wrap up this week's edition, we stay on the theme of reform. And of all the countries in the world, Ireland isn't one I'd point to and say "boy, that's a country in dire need of deep and comprehensive corporate tax reform." But with Ireland facing the twin specters of Brexit and a possible competitive threat on tax from the United States – its largest source of foreign direct investment – this is exactly what the business association IBEC thinks the country requires.

With one third of employment in Ireland linked to sectors that export heavily to the UK according to financial services provider Merrion Capital, Ireland is rightly worried that Brexit will destabilize its relationship with a vital trade partner. And a recent survey by PwC has revealed a level of pessimism among Ireland's CEOs in relation to the Brexit-effect on Ireland, with almost three quarters of those surveyed predicting that the outcome would probably be negative for the country.

Now President Donald Trump has added to Ireland's woes with his promise to throw up trade barriers, and to slash corporate tax to almost Irish levels. How will Ireland cope if these developments come to pass?

So, it is not surprising that amid all these uncertainties, Ireland is a worried nation, as demonstrated by the regular news items attesting to its economic anxieties. Because, as we know, uncertainty is one of the investment community's biggest turn-offs. But it could be argued that stability, rather than a rush reform, is more preferable in this instance. And the Government is probably being sensible by resisting such calls for now. Let's not forget, Ireland has recent experience of deep crisis, and it didn't panic then. Things seem to have worked out okay...

Kitty's Encomiums and Execrations

Methodology: each week (this is the 147th) one or more countries are given encomiums and one or more are given execrations. Those are the entries below with descriptive links. In the following week, each encomium counts as + 1 for that country, and each execration counts as – 1, being added to that country's existing score. Over time, therefore, a ranking will build up for each country, and further countries will join the listing. Germany is at minus 2, since in the second week it had an execration and in the first week it had an encomium, leaving it at neutral; then it had an execration in week four, thus dropping to – 1, and another one in week six, dropping to – 2; finally in week 13 it got something right, so it went back up to – 1; then in week 16 it gained a further star, so then it was in neutral territory until week 23 when it dropped back to minus one, but reverting to neutral territory in the following week, then dropping to minus one in week 50, and back up to plus one in week 51, then to plus two in week 52. Some weeks ago it dropped a place, but then quickly recovered one step. Etc etc.

The rankings are intended to be a proxy for business friendliness; evidently they are highly partisan, but as time goes by they are becoming useful for decision-making. For any country in negative territory, you should think carefully before starting a business there.

About the Author

Kitty Miv, Editor

Kitty was born in Argentina in 1960 to a Scottish cattle rancher and his Argentine wife. Educated in Edinburgh and at Princeton, Kitty worked for the World Bank as an economist, where she met and married an emigre Iranian banker. During her time with the Bank, Kitty worked in a number of emerging markets, including a spell in the ex-USSR as a Transition Economies Team Leader. Kitty is now a consultant in Brussels and has free-lance writing relationships with a number of prominent economic publications. kitty@lowtax.net

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